Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/210869
Authors: 
Wang, Dieter
van Lelyveld, Iman
Schaumburg, Julia
Year of Publication: 
2019
Series/Report no.: 
ESRB Working Paper Series 94
Abstract: 
This paper revisits the credit spread puzzle for banks from the perspective of information contagion. The puzzle consists of two stylized facts: Structural determinants of credit risk not only have low explanatory power but also fail to capture common factors in the residuals. We reproduce the puzzle for European bank credit spreads and hypothesize that the puzzle exists because structural models ignore contagion effects. We therefore extend the structural approach to include information contagion through bank business model similarities. To capture this channel, we propose an intuitive measure for portfolio overlap and apply it to the complete asset holdings of the largest banks in the Eurozone. Incorporating this unique network information into the structural model increases explanatory power and removes a systemic common factor from the residuals. Furthermore, neglecting the network likely overstates the importance of structural determinants.
Subjects: 
information contagion
credit spread puzzle
bank business model similarities
portfolio overlap measure
dynamic network effects model
JEL: 
G01
G21
C32
C33
C38
Persistent Identifier of the first edition: 
ISBN: 
978-92-9472-081-8
Document Type: 
Working Paper

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